HOW IT IS TRANSFORMING COMPETITION · By 2015 there will be 1 trillion sensors linking the physical and digital worlds merging to become an “Internet of Things ... - ERP/SCM/CRM

WIRED FOR INNOVATION HOW IT IS TRANSFORMING COMPETITION

Erik Brynjolfsson MIT Sloan School and MIT Center for Digital Business http://digital.mit.edu/erik

Generous support for this research was provided by the National Science Foundation and the MIT Center for Digital Business. Copyright © Erik Brynjolfsson. Reproduction prohibited

http://digital.mit.edu/erik

Copyright (c) Erik Brynjolfsson 2

“The Great Recession” “The Great Restructuring”

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IT and Productivity: The Data Speak

IT Stock (relative to industry average)

Productivity (relative to

industry average)

Copyright (c) Erik Brynjolfsson

Source: Brynjolfsson and Hitt 2003

Corporate Performance Spread

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Performance Spread: Gross Profit Margin

Low IT Industries

High IT Industries

5 Copyright (c) Erik Brynjolfsson

Digital Advantage survey overview

*

* Manu- facturing

* Health Care and Social Assistance

Finance and Insurance

Wholesale Trade

Utilities & Natural Resources

Transportation and Warehousing

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*

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SOURCE: Digital Advantage Survey

330 companies interviewed by team at MIT

Respondents by category Percent

Respondents by revenue group Count

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Research Questions

1. Do more data-driven decision-making

practices make firms more productive?

2. Do more data-driven decision-making

firms outcompete their rivals in

profitability and market valuation?

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Data Driven Decision-makers are Winning

Greater Performance:

4% higher productivity

and top line sales

Source: Brynjolfsson and Kim (2011a)


Competitive Advantage:

6% greater profitability, and

higher total market value

Source: Brynjolfsson and Kim (2011b)

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Experiment

Measure

Share

Replicate

IT Enables Four Drivers of Innovation

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Measure

New Tools Beget Revolutions

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Nanodata and Now-casting


Clickstream/Page views/Web transactions

Mobile phone/GPS/Location data

Email messages

RFID

Web links/Blog references/SSRN/Facebook

ERP/CRM/SCM transactions

Real-time machinery diagnostics/engines/equipment

Google/Bing/Yahoo Searches

Bar code scanner data

Stock market transactions

Twitter feeds

Wikipedia updates

Etc….

The Internet of Things


By 2015 there will be 1 trillion sensors linking the physical and digital worlds merging to become an “Internet of Things”

Data vs. HiPPOs

Wine Chemistry Housing Sales Truck Routing

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Predicted vs Actual Home Sales

Predicted

Actual

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FL ID IA LA

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OK RI

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predicted Home Sales 2009Q3

predicted

In the September, 2009 draft of NBER paper (submitted for workshop), we used our model to estimate sales in Q3 2009.

We predicted the average home sales for the entire nation would increase by 6.4%

The National Association of Realtors predicted an 8.1% increase.

On Nov. 24, 2009, the housing sales for Q3 were announced …

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… as increasing 6.1%.

•Nanodata produced a 66% improvement over the baseline model

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Experiment



Experimentation at Harrah’s

�Gary Loveman

Zero executive experience

Zero background in Casinos

But, an MIT PhD who knows how to make numbers talk

Results

Transformed Harrah’s from second tier to number one gaming company in the world

Completed a $30.7 Billion LBO

Introduced a culture of pervasive field experimentation

“There are two ways to get fired from Harrah’s…”

“We have come out on top in the casino wars by mining our customer data deeply, running marketing experiments and using the results to develop and implement finely tuned marketing and services strategies that keep our customers coming back.”

-- Gary Loveman, CEO, Harrah’s


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Share

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Cisco’s Mac Wiki

- Over 10,000 Macintosh users at Cisco, but no central IS support

- A few users established a wiki, where users could post tips, tricks, files, links and other content

- Example: tip for using the Linux printers which were ubiquitous at Cisco

- Many users all over world got up to speed entirely via Mac Wiki

- Thousands of small ideas from hundreds of users


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Replicate


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What Does IT Do?

1. Replicate Bits



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What Does IT Do?

1. Replicate Bits

2. Replicate Processes


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Case Study: CVS

Basic ‘script fulfillment process:

27% of scripts encountered a problem

16% of customers disappointed at pick-up

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INVENTORY

Drop -offData

EntryProduction

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AssurancePick -up

Standard

script path

Data entry

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Dr. callor

Production

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Drop -off

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INVENTORY

Drop -offData

EntryProduction

Quality

AssurancePick -up

Standard

script path

Data entry

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Dr. callor

Production

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Drop -off

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1 hour before pick-up 1st step = drug utilization review (DUR)

2nd step = insurance check


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CVS: Scale without Mass

Short-term results: customer satisfaction scores Wait time satisfaction: 76 86 Overall pharmacy satisfaction: 86 91

New process embedded in Enterprise IT (EIT) 100% compliance

Rapid roll-out to over 4000 retail pharmacies

Drop-offData

Entry

Insurance

checkProduction DUR QA Pick-up

While customer is present

Drop-offData

Entry

Insurance

checkProduction DUR QA Pick-up

While customer is present

New fulfillment process:


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IT Reduces the Costs of Measurement,

Experimentation and Replication


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Synergies Amplify The Benefits

A new kind of R&D

Experiment

Measure Share

Replicate

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Three Implications for Executives

1. Recognize the heightened value of innovation

Adjust recruiting, retention and incentives systems

Innovations can be big or small`

Change the culture:

From analyze and plan to experiment and replicate

2. Invest in technologies and platforms that collect, aggregate, codify, share and/or propagate data and innovations

- ERP/SCM/CRM etc.

- BI, Cloud computing, Enterprise-strength Web 2.0 and Social networking

3. Apply the four step process Experiment, Measure, Share and Replicate

To learn more about my research,

please visit my website:

http://digital.mit.edu/erik

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Medium IT Industries

Concentration is Increasing

High IT Industries

Low IT Industries


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High IT-using Industries

Medium IT-using Industries

Low IT-using Industries

Sales Turbulence Has Also Increased


The Information Gold Mine

Digital Information is Doubling Every 1.2 years

Over 5 Exabytes every two days; more than in all history through 2003

The size of the largest data warehouses is tripling every two years

Exceeds processor growth predicted by Moore’s law

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Other Examples Google

Page rank algorithm 2008 is very different from 1999 algorithm

Advertising auctions are continuously fine tuned

Even HR – are you a record-holder in something?

Netflix

How do YOU pick your next movie?

Tesco

From #2 to #1

VA Hospitals

“Evidence based medicine”

Capital One Credit card offers tests

Call Center Employee incentives and customer service

Schools in Africa Poverty Action Lab: Digital cameras reduce teacher absenteeism

Field Experiments with rapid feedback = R&D


Four Steps to the Future of Business

1. Design and field numerous experiments

2. Measure results in great detail

3. Share findings and identify winners

4. Rapidly and cheaply replicate winners

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Digital Darwinism:

Accelerating Discovery and Competition

Documents

HOW IT IS TRANSFORMING COMPETITION · By 2015 there will be 1 trillion sensors linking the physical and digital worlds merging to become an “Internet of Things ... - ERP/SCM/CRM